Norges Bank raises interest rates – E24

Norges Bank decided to raise the key interest rate from 0.5 to 0.75 per cent.

There was broad expectation up front that Norges would raise the interest rate by a quarter of a percentage point, in line with previous indications from the bank.

– As we are now assessing the outlook and risk profile, the key policy rate is likely to rise further in June, says Governor Ida Walden Bach.

I think the banks raise interest rates more

Nordea interest rate strategist Lars Moland notes that banks usually raise interest rates as much as Norwegian banks, but the situation is different now.

– Money market and credit margins on mortgage financing have increased much more than the increase from the Norges Bank. Therefore, we think it is reasonable to raise the mortgage rate by about 0.35 basis points, Moland says.

The war in Ukraine creates uncertainty

The decision came unanimously among members of the Norges Bank’s Monetary Policy and Financial Stability Committee, which sets the key policy rate.

Norges Bank wrote in a report on rate hikes that activity in the Norwegian economy continued to increase after the removal of infection control measures this winter. The employment rate has risen further, and the capacity utilization in the economy appears to be higher than the normal level.

“The war in Ukraine creates uncertainty about economic development, but chances are that the recovery in the Norwegian economy will continue,” the report said.

Wage and price growth was higher than expected, and wage expectations increased. Higher wage growth and higher growth in the prices of goods we import are expected to raise core inflation going forward, according to the Norges Bank.

More interest rate hikes in the coming years

According to Norges Bank’s interest rate forecast (interest rate path), there is now a peak interest rate of 2.5 percent in 2023. This corresponds to at least 7 increases in interest rates.

The track then shows a somewhat lower interest rate, at a level of 2.3 percent at the end of 2025, indicating interest rate cuts.

If there are prospects for more permanent high inflation, interest rates may be raised more quickly, the central bank reports.

Kjersti Haugland, chief economist at DNB Markets, says there is a risk that further rate hikes could occur this year if price growth is higher than expected. Then they can choose to move faster.

This has to be seen in light of wage developments which play a major role, and whether there will be permanent rises in inflation. Or if there are strong drivers of fiscal policy, that is, whether the use of money can perpetuate high price pressures, Hoagland says.

– Significant upward adjustment of the interest rate trajectory

Norges Bank is announcing a significantly higher interest rate going forward, as the key policy rate will continue to rise in June, and 2.5 per cent by the end of 2023, says Elizabeth Holvik, chief economist at Sparebank 1 Gruppen.

There is a significant upward adjustment to the interest rate trajectory. I think this makes sense because the picture is now with price pressure and the risk of higher prices and wages in the future, Holvik says.

I would have expected that they would hike the interest rate trajectory, given the inflationary pressures and the Norwegian economy having positive effects from higher oil and gas prices as well as refugee flows contributing to creating price pressure trends.

Danske Bank Chief Economist Frank Gollum says there is tension associated with the rate path.

– The upward adjustment was more severe than we thought. Interest rates are expected to rise 8 times in 2022 and 2023 until peaking at the end of 2023. Then we think they will drop back to the natural rate of interest. This shows that the threshold for getting 50 points at a meeting is very high, and the threshold is also high for interest rates to increase outside of major meetings.

Increases the requirements of the bank

The countercyclical capital reserve requirement for banks has been increased to 2.5 percent, effective March 31, 2023.

– It will contribute to a somewhat lower growth in credit, says Holvik at Sparebank 1 Gruppen.

The countercyclical capital reserve is part of the overall capital requirements that banks must meet in order to become more robust. Demand often increases when there is more financial imbalance. It was previously decided to increase buffer requirements from 1.0 percent to 1.5 percent as of June 30, 2022, and to 2.0 percent as of December 31, 2022.

High inflation (inflation) in the wake of the pandemic and the war in Ukraine has raised interest rate expectations among economists.

Norges Bank’s goal in setting interest rates is to keep inflation close to 2% over time.

Previously, the central bank had forecast a peak interest rate of 1.75 percent by the end of 2024.

At the start of the pandemic, the interest rate was 1.5 percent, but quickly fell to a record low of zero percent in the spring of 2020. First in September last year came the first rise to 0.25 percent, with a subsequent rise to 0.5 percent in December.

Ida Waldenbach took over as interim central bank governor on March 1, while Jens Stoltenberg will complete his time as NATO head and is due to take over from December.